A way to sell a home despite tough lending environment

By JERRY CHAUTIN

Published: Monday, December 10, 2012 at 1:00 a.m.

Last Modified: Saturday, December 8, 2012 at 5:02 p.m.

Larger down payments, higher credit scores and painstakingly documented proof of income are a few of the more difficult requirements now being imposed in our more regulated mortgage lending environment. Consequently fewer would-be homeowners are able to qualify.

That's why I wrote about the lease-to-own technique last week as a way for sellers and buyers to overcome these hurdles. It kicks the selling date 12 to 24 months down the road and gives buyers more time to qualify for a mortgage. For sellers, it presupposes increased home values and higher selling prices.

But what if you must sell now and are not willing to wait 12 to 24 months?

"You become the banker and carry back a wrap-around mortgage," says John Greer, a real estate investor, owner of John Greer Auto Sales in Bradenton and also the founder of the Young Entrepreneurs of Sarasota networking group.

A wrap-around mortgage is all-inclusive seller financing that rolls the existing first mortgage and seller financing into one. The homebuyer only makes monthly payments on the resulting wrap-around.

The seller-financing portion is usually at a higher interest rate than the first mortgage. That leverages the all-in rate paid by the homeowner to boost the seller's yield.

To calculate the yield on a specific deal, download a wrap-around spreadsheet from mtgprofessor.com/Spreadsheets.

In a more typical seller financing transaction, the buyer makes a down payment that pays part of the seller's equity.

The rest is covered by a second mortgage which is junior to an existing first mortgage. Then the homeowner makes separate payments to the seller and the bank holding the first mortgage.

But if the bank forecloses because payments are not made, the second mortgage holder can be wiped out. By contrast, a wrap-around gives the seller more control.

Of course the homeowner is at risk of the seller who is holding the wrap-around not making payments on the underlying first mortgage. So it's essential for homebuyers to get legal advice before entering into this type of transaction.

Sellers also have reason to be concerned, because most conventional home mortgages have a "due on sale" clause in the mortgage note.

It gives the lender an option to demand full payment of the mortgage balance when there is a change of ownership.

Exceptions are Federal Housing Administration and Veterans Administration loans. FHA allows change of ownership and the Veterans Administration permits it by qualified veterans.

But even with conventional mortgages, Greer says that it is unusual for lenders to exercise the due-on-sale option if payments are made on time and the loan is current.

"I have never had a bank call a perfectly paying loan," he said.

Nonetheless, there are reasons for concern and some lawyers advise sellers against using this technique to sell houses without getting the first mortgage holder's consent.

Most of the time, however, bankers are not willing to waive the due-on-sale provision, even when they choose not to exercise their option.

Buyers and sellers are advised to seek legal advice in order to understand their risk.

Jerry Chautin is a local volunteer business counselor with Manasota SCORE, Counselors to America's Small Business. Send business questions and stories to him at jkchautin@aol.com and follow him on Twitter.com/JerryChautin.

<p>Larger down payments, higher credit scores and painstakingly documented proof of income are a few of the more difficult requirements now being imposed in our more regulated mortgage lending environment. Consequently fewer would-be homeowners are able to qualify.</p><p>That's why I wrote about the lease-to-own technique last week as a way for sellers and buyers to overcome these hurdles. It kicks the selling date 12 to 24 months down the road and gives buyers more time to qualify for a mortgage. For sellers, it presupposes increased home values and higher selling prices.</p><p>But what if you must sell now and are not willing to wait 12 to 24 months?</p><p>"You become the banker and carry back a wrap-around mortgage," says John Greer, a real estate investor, owner of John Greer Auto Sales in Bradenton and also the founder of the Young Entrepreneurs of Sarasota networking group.</p><p>A wrap-around mortgage is all-inclusive seller financing that rolls the existing first mortgage and seller financing into one. The homebuyer only makes monthly payments on the resulting wrap-around.</p><p>The seller-financing portion is usually at a higher interest rate than the first mortgage. That leverages the all-in rate paid by the homeowner to boost the seller's yield.</p><p>To calculate the yield on a specific deal, download a wrap-around spreadsheet from mtgprofessor.com/Spreadsheets.</p><p>In a more typical seller financing transaction, the buyer makes a down payment that pays part of the seller's equity.</p><p>The rest is covered by a second mortgage which is junior to an existing first mortgage. Then the homeowner makes separate payments to the seller and the bank holding the first mortgage.</p><p>But if the bank forecloses because payments are not made, the second mortgage holder can be wiped out. By contrast, a wrap-around gives the seller more control.</p><p>Of course the homeowner is at risk of the seller who is holding the wrap-around not making payments on the underlying first mortgage. So it's essential for homebuyers to get legal advice before entering into this type of transaction.</p><p>Sellers also have reason to be concerned, because most conventional home mortgages have a "due on sale" clause in the mortgage note.</p><p>It gives the lender an option to demand full payment of the mortgage balance when there is a change of ownership.</p><p>Exceptions are Federal Housing Administration and Veterans Administration loans. FHA allows change of ownership and the Veterans Administration permits it by qualified veterans.</p><p>But even with conventional mortgages, Greer says that it is unusual for lenders to exercise the due-on-sale option if payments are made on time and the loan is current.</p><p>"I have never had a bank call a perfectly paying loan," he said.</p><p>Nonetheless, there are reasons for concern and some lawyers advise sellers against using this technique to sell houses without getting the first mortgage holder's consent.</p><p>Most of the time, however, bankers are not willing to waive the due-on-sale provision, even when they choose not to exercise their option.</p><p>Buyers and sellers are advised to seek legal advice in order to understand their risk.</p><p><i>Jerry Chautin is a local volunteer business counselor with Manasota SCORE, Counselors to America's Small Business. Send business questions and stories to him at jkchautin@aol.com and follow him on Twitter.com/JerryChautin.</i></p>